Focus Fixed Income - February 2020
The health crisis, triggered by the coronavirus outbreak, is expected to hamper global growth.
IN A WORD:
The health crisis, triggered by the coronavirus outbreak, is expected to hamper global growth. Risk aversion has been noticeable in bond markets but there has been no panic. Bond yields have fallen to near all-time lows. Credit spreads have widened moderately. Asian central banks have eased monetary policy. We don't think the Fed and the ECB will follow suit.
Bond yields are likely to rise once the risk aversion phase is over. The increase is expected to be limited notably due to supply and demand dynamics. Our 12-month targets are 2% for the US Treasury and -0.25% for the German Bund.
Periphery countries in the eurozone have made the headlines as their latest sovereign issues attracted record demand. Periphery bonds are expensive, and should remain so in the absence of attractive yields in other eurozone countries.
We maintain our preference for short-dated US dollar sovereign bonds, euro and dollar Investment Grade bonds, eurozone convertibles, Emerging Market sovereign bonds in local currency and Emerging Market corporate bonds denominated in hard currency.